QACA Definition of Compensation

[ERISA25]

The QACA rules provide that a plan must use the Section 414(s) definition of compensation for automatic contributions. May a plan that has a QACA use a different definition of compensation for participants who already made affirmative elections? In other words, does the 414(s) requirement also apply to affirmative elections?

[Tom Poje]

well, a QACA is a safe harbor 401(k) plan.

under the safe harbor rules

1.401(k)-3(b)(2) --> safe harbor comp means comp as defined in 1.401(k)-6

1.401(k)-6 Compensation......whichever period is selected must be applied uniformaly to determine the compensation of every eligible employee...

(the only 'sort of exception' I know of is limiting comp from date of participation.)

[ERISA25]

well, a QACA is a safe harbor 401(k) plan.

under the safe harbor rules

1.401(k)-3(b)(2) --> safe harbor comp means comp as defined in 1.401(k)-6

1.401(k)-6 Compensation......whichever period is selected must be applied uniformaly to determine the compensation of every eligible employee...

(the only 'sort of exception' I know of is limiting comp from date of participation.)

Are you saying that having a QACA feature in a Plan makes the Plan a safe harbor 401(k) plan? It seems to me that you are required to use the safe harbor definition of compensation for contributions made under the QACA, but you are not required to use that definition in regard to participants who make affirmative elections. Thanks for your response.

[Tom Poje]

A QACA is indeed a safe harbor 401(k) with the following exceptions or alternate possibilities:

1. vesting - does not have to be immediate, can be a 2 year cliff. (though with a 1 year wait for eligibility this condition is almost moot, unless someone quits shortyly after entering the plan)

2. an additional option is available for the match - 100% on the first 1% and 50% on the next 5%

a handy dandy description from the DOL can be found here:

http://www.dol.gov/ebsa/pdf/automaticenrollment401kplans.pdf

see page 5, 2nd column

[ERISA25]

Thanks, Tom. One more question. The Preamble to the Regulation provides that "compensation for purposes of determining default contributions means safe harbor compensation as defined in 3(b)(2)...", which links to 414(s), etc. It seems to me that you must use 414(s) comp for all default contributions, but you do not have to use safe harbor comp for contributions that are not made automatically under the arrangement (affirmative elections).

[Tom Poje]

In a safe harbor plan the regs (or at least the original Notice clearly gave an example in which bonuses were excluded) without looking it up, I think it was worded that this was fine as long as the participant could receive the max match. no solution was offered if you ended up in a situation in which someone couldn't, ugh. I hate to think of how you would correct.

I'd have to go back and re-read things about comp. not sure why you would want to handle the people differently for what little (if any) it may save you. I'm not even sure if that would be the intent of the regs to create a situation in which that would happen. that seems inconsistent with the spirit of things.

I thought the main issue of those taking the default and those not was whether to provide a notice or not.

sorry can't be more helpful

[ERISA25]

Here's a difft angle. To allow more flexibility for participants who make affirmative elections, and to avoid any potential 401(a)(17) issues, we want to amend the plan to define the plan limit as the 402(g) limit. IRS has said, albeit informally,

"if the plan terms provide that participants can't defer more than 6% of comp, that would be 6% of the Section 401(a)(17) lmiit. If the plan is vague and has an election form that allows the participant to elect a percentage, but the actual plan limit is the Section 402(g) limit, then 401(a)(17) is not a problem."

The QACA rules unfortunately provide that you can't defer more than 10% of comp (401(a)(17)) for automatic deferrals. We would like to amend the plan with respect to affirmative deferrals to provide that the actual plan limit is the 402(g) limit. This way participants can make deferrals up to the 402(g) limit without any issues under Code Section 401(a)(17).

I have read the QACA regulation and do not see anything in there that stops us from making such an amendment. Any thoughts?